The Returns On Capital At Southern Packaging Group (SGX:BQP) Don't Inspire Confidence

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after we looked into Southern Packaging Group (SGX:BQP), the trends above didn't look too great.

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What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Southern Packaging Group:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.017 = CN¥9.7m ÷ (CN¥1.1b - CN¥556m) (Based on the trailing twelve months to December 2024).

Therefore, Southern Packaging Group has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Packaging industry average of 7.9%.

Check out our latest analysis for Southern Packaging Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Southern Packaging Group's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Southern Packaging Group.

So How Is Southern Packaging Group's ROCE Trending?

We are a bit anxious about the trends of ROCE at Southern Packaging Group. Unfortunately, returns have declined substantially over the last five years to the 1.7% we see today. What's equally concerning is that the amount of capital deployed in the business has shrunk by 21% over that same period. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 50%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 1.7%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Key Takeaway

To see Southern Packaging Group reducing the capital employed in the business in tandem with diminishing returns, is concerning. However the stock has delivered a 80% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you'd like to know more about Southern Packaging Group, we've spotted 4 warning signs, and 3 of them are a bit unpleasant.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.